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SEC wrestling with "conflict minerals" disclosure

Securities regulators are struggling to craft a rule that sheds light on companies that use certain African "conflict minerals" but avoids a compliance nightmare that hurts manufacturers.
/ Source: Reuters

Securities regulators are struggling to craft a rule that sheds light on companies that use certain African "conflict minerals" but avoids a compliance nightmare that hurts manufacturers.

The Securities and Exchange Commission is six months behind schedule in finalizing the rule that is required by last year's Dodd-Frank financial oversight law.

The rule, which was tucked into the legislation at the last minute, will require companies to disclose whether they use tantalum, tin, gold or tungsten from the war-torn Democratic Republic of the Congo.

The agency is holding a roundtable discussion on Tuesday to hear from companies, human rights organizations and other stakeholders. The SEC has asked for help navigating the mine field of tricky issues such as tracking conflict minerals through the supply chain and "workable" due diligence.

Corporations such as AT&T have criticized the rule as overreaching.

They say it could trip up companies who contract with manufacturers and have little, if any, control or knowledge about the origins of minor amounts of minerals that end up in their products.

Fear about running afoul of the pending reporting rule has already prompted some companies such as Apple Inc and Hewlett-Packard Inc to stop sourcing from the region.

"If you go from compliance on through, this starts to set up not only nightmare scenarios, but also costly scenarios that make it difficult for companies to ensure an adequate supply of raw materials," said Tom Quaadman, the vice president of the Chamber of Commerce's Center for Capital Markets Competitiveness.

The SEC issued a draft proposal of the rule in December and hopes to finalize it by the end of the year, according to the agency's website.

The challenges of implementing the rule are many.

For a start, companies will need to identify whether or not any of the four "conflict minerals" are contained in their products - something that is not always known.

Then, if the mineral is present in the manufactured good, the company would have to exercise due diligence to determine where the metal came from. That could mean going through layers upon layers of suppliers, some of whom may be private companies located in third-world countries.

And if the metal has been recycled, as gold often is, it could get even trickier to track.

"What would be required here is the development of a global compliance infrastructure," said Brian Cartwright, a senior adviser at Latham & Watkins and former general counsel for the SEC.

"The notion is that any public company in the United States will have to file, in annual reports, as an exhibit, a conflict minerals report that has been subject to an independent private sector audit," said Cartwright.

Many companies, business groups and lawyers have urged the SEC to phase in the new rules over time to help make it easier to comply. They also want the SEC to narrow the scope of the rule so that companies are not forced to track trace amounts of minerals.

But human rights groups are staunchly opposed to a phase-in period, saying the SEC needs to follow the Dodd-Frank mandate and implement the rule without delay. Because the conflict minerals rule is required by the law, the SEC has little wiggle room to stray from congressional intent.

"Businesses should be held accountable for human rights issues, and investors find these concerns to be material in that they, at the end of the day, affect companies' image and bottom line," said Amol Mehra, the coordinator of the International Corporate Accountability Roundtable. "All companies need to do... is simply tell us what is in their products."

The SEC must also deal with potential legal challenges to the final rule.

The Chamber of Commerce, which in July successfully convinced a federal court to overturn the SEC's proxy access rule, has its sights on a possible challenge of the conflict minerals rule if the agency does not improve its cost estimates.

The agency's proposal had initially estimated the total paperwork burden of compliance would be $71 million. But the Chamber says that figure is woefully inadequate.

The National Association of Manufacturers, a leading trade group fighting the proposal, has estimated the conflict minerals plan could cost industry between $9 to $16 billion to implement.